I-T raids reveal problems in corporate governance

MUMBAI: In the past three months, the income-tax department has conducted raids and searches at over a dozen listed companies. In some cases, media reports quoting unnamed I-T officials have referred to recovery of unaccounted income or assets, raising questions about compliance of corporate governance norms by some of these publicly-traded entities.

While some companies have disputed the claims of I-T officials that undisclosed money had been found, others have chosen not to comment. Firms which have come under the I-T department���s scanner include real estate major HDIL, shipping major ABG Shipyard, Supreme Infrastructure, Temptation Foods, Bombay Rayon, J Kumar Infra, Radhe Developers and the IPO-bound Polycab Wires, according to media reports and stock exchange filings.

According to people closely connected with the developments, several other Mumbai and Ahmedabad based infrastructure, logistics and textile companies have also been searched in recent months by the I-T department.

While the exact amount that was recovered is not known, according to I-T officials money detected, on which tax has not been paid, has totalled over Rs 1,000 crore in just three months. "This is a big corporate governance issue and implies a direct loss to investors," says Hinesh Doshi, vice-president, of the Investors��� Grievances Forum, a SEBI registered association that typically takes up issues concerning investor interests.

"Why is there large amounts of unaccounted income or undisclosed assets with these companies? I think regulatory authorities should investigate the matter, or confidence of investors will be affected," he added.

Mr Doshi adds that despite news reports of raids on companies, some of them do not clarify their position to exchanges. This is despite the fact that according to listing agreements, companies have to report "material developments". BSE said that it would not like to comment while NSE did not respond to an e-mail query.

Consider the case of Austral Coke. It has so far not made any official statement to the exchange on the raids conducted by the I-T department and subsequent charges faced by the company from the market regulator.

While companies from the real estate sector have largely been the focus of such searches by the department, firms from other areas have also come under the scanner for allegedly not paying tax. Some companies disputed the claims of I-T officials that undisclosed money had been found.

Shipping major ABG Shipyard, while confirming that search operations had taken place, told the exchanges that it has complied with income-tax laws and that authorities have not raised any claims against the company after the search operations.

"The issue has two sides to it. In case any unaccounted money or assets are found in an action against a listed company, it is just not an issue of tax evasion, but also of misappropriation of the assets belonging to the shareholders," says Vinod Ambavat, a partner with professional advisory firm Jain Ambavat & Associates.

In another instance, tiles company Nitco said the Directorate of Revenue Intelligence had searched the premises of Nitco with respect to investigation of Customs duty payable on import of marble blocks. It had detained goods worth Rs 9.7 crore for verification, for which the bill of entry had already been filed. A senior official at Supreme Infrastructure said the search was due to some difference of opinion on some issues related to expenses.

The matter is still pending with the department. However, the company has paid all the legitimate taxes for financial year 2009, the official said.

HDIL, the real estate company, told the stock exchanges that I-T department had conducted a raid on office premises and the residences of its promoters. After the raid, HDIL agreed to offer approximately Rs 350 crore as income to be booked in remaining quarters of financial year 2009-10.

The income of Rs 350 crore as calculated by I-T department are based on initial entries in books of accounts mostly relating to the current financial year, which the company would have booked during the current financial year on completion of transaction and taxes paid as per provisions of I-T Act, HDIL said.

Under the provisions of the Income-Tax Act, income unearthed during a raid attracts interest and penalty up to 300% of the amount. The law also provides the taxpayer the right to appeal before the first appellate authority (Commissioner Appeal), against the demand by the I-T department.

While the I-T department spokesperson declined to comment on the same, sources in the I-T department said the department wants to crack on big tax evaders so as to meet their targets. "There is a clear dictum to catch big fish if the department wants to meet the collection targets. There is pressure at every level," says a Mumbai based I-T official.

Earlier this year, ET had reported how IT department faced with worrying situation of shrinking collections was gearing up for some high-profile raids to send out a clear message.